Investment Frontier’s 5 areas of focus for 2018 & top 5 posts of 2017

By now, we suspect that most people are out of their holiday coma and looking to get running in 2018. We wanted to highlight the 5 most-read pieces on our site in 2017 as well point out 5 areas of focus for 2018 for Investment Frontier.

Most-Read

Where are the highest interest rates in the world in 2017?
As it seems has been the case for the last ten years, interest rates remained the center of all discussion in 2017. Janet Yellen began raising rates and LIBOR moved materially. All of this resulted in renewed interest in Frontier Market bonds as a way to add yield without necessarily increasing risk, if done in a prudent manner. We covered the highest rates at the time (Apr 2017) and will complete an updated version for 2018 around the same time (post 1Q 2018).

How to Invest in Egypt
Egypt began stabilizing in 2017, despite the government’s complete loss of control of the Sinai Peninsula. The main economic hubs of Egypt (around the Nile delta) and Alexandria are reasonably stable and growth has resumed. This article highlights the interest in Egypt right now, and our effort was to provide an easy to follow instruction on how to invest in the country.

How to Invest in Jordan
Similar to Egypt, Jordan has had a lot of interest this year, as the economy begins to transition to a country of medium wealth from a rather poor one. Jordan has had the blessing and curse of not relying on oil revenues to drive its growth. Despite the largest influx of refugees (as a % of the population) anywhere, the country has coped remarkably well.

How to calculate currency adjusted returns
This was a foundational piece that is basic but has not been adequately covered on the internet. For those investors looking to diversify abroad, it is critical that currency is considered as part of their investment. Too often, equity returns are looked at in isolation and do not factor in the currency exchange that is inevitable when capital is repatriated.

Who are the best Frontier Market managers? 2017 Edition.
Our annual assessment of the best investment managers in Frontier Markets. This is an increasingly difficult and complex task due to the proliferation of investment managers and strategies that are devoted to Frontier Markets. It will get exciting and increasingly competitive, every time we do this. Stay tuned for our 2018 edition in approximately June 2018.

Key 2018 Topics

Every year at the start we assume certain things will happen and some of them do, and then there are all sorts of things we did not conceive of, that end up taking a significant portion of attention during the year. We prefer to be thematic and secular in the nature of our stories, rather than fixated on speculation. In that spirit here are five themes that we are studying for 2018.

Digital Assets
We have not talked about Bitcoin since 2013. The article is amusing to read today, as we talk about penny stocks and speculation because Bitcoin had hit $100. It is entirely unclear to us, whether or not Bitcoin is in a bubble or not. We don’t understand the market and have been reticent as a result to write about it. It could keep going up, or it could crash to $100 and nothing about our perceptions of the world’s economy would change.

However, there is genuine innovation that is game-changing afoot. Unfortunately, it is difficult to decipher amongst the hucksters, speculators, and fools that bellow their ignorance on all things digital. Blockchain is legitimately one of the most innovative financial features in decades. Digital currencies as a whole, have a legitimate home in the global economy 100 years from now. How we get there, and which currencies reign supreme is unknown, but it is certainly true that the standard of quality for these things to be successful is lowest in Frontier Markets. There is a lot of potential utility of a ledger and a medium of exchange that isn’t tied to Kim Jong-Un or Zimbabwe or Yemen.

We would like to focus on how digital assets as a whole are affecting Frontier Markets and what we think a prudent approach to investing in Frontier Markets in the context of digital assets would look like.

What does corruption mean
We all have a sense of what corruption means, generally benefiting oneself at the cost of the many, by way of using one’s professional or personal status to extract favor and illegitimately extract gains. However, what most do not understand is how does corruption actually function on a day-to-day basis.

We have discussed corruption many times, but we have not discussed how corruption actually works. In certain countries, corruption is predictable and known. In effect, it functions as a redistribution of wealth and is relatively efficient. In other countries, corruption is unpredictable and who and what it affects can change and vary as well as the degree of the effect. This type of corruption can cause a rapid decline in a country’s well-being (Venezuela). We have seen Saudi Arabia attempt to clean house, and we have seen the US embroiled in lobbying issues since Trump’s election. Understanding corruption and how it could affect you in Frontier Markets is important because it will affect you.

Real Estate Land Leases
We discussed how real estate investment is structured in Frontier Markets recently here. We made a commitment to do a deep dive on how to value real estate when land leases apply (the vast majority of Frontier Markets).

This is not something that many have covered. However, it is a very important topic as real estate is the largest store of value/wealth in the world, by far. It is the asset upon which businesses are funded, new capital projects are made, financing is secured, and a retirement is paid for. Any investor should have investment properties in their portfolio. Certain kinds of investors may wish to consider foreign investment properties as an added diversifier for their portfolio. We will look at how such an individual should assess the opportunity.

What is a country worth?

We repeatedly here comparisons such as Apple a country on its own and the 17th largest economy in the world. This is happening with Bitcoin too. Unfortunately, these are among the stupidest comparisons in finance. A country’s GDP measures a country’s economic output in a given year. If anything, it may be a proxy for the earnings or even perhaps the revenue of a country.

A market cap is the value that a buyer would pay for a company with an expected stream of cashflows. GDP may be most apt as the measure that receives a multiple to value the economy. Furthermore, countries are perpetual in nature and the economy will have a very low cost of capital because even if the government defaults, economic output would not disappear. We want to get people thinking about what a country is actually worth, rather than a fatuous comparison of a public company’s market cap and a country’s GDP.

Computer-assisted decisions
This is a rather complicated topic that similar to digital assets has had its key themes used as buzz words to the extent that it has lost meaning (machine learning, artificial intelligence etc.). However, we think that there is a big space/opportunity for models, simulations, and machine learning systems to aid and guide Frontier Market countries in a way that improves economic outcomes. Specifically, most Frontier Markets are relatively unsophisticated (compared to a diverse industrial economy like that of the US or Germany). There are lessons in history and experience of other countries that can be used to make better decisions than ill-equipped regulators and leaders in these markets often do.

Additionally, there is an opportunity to improve systems such as health care and electricity delivery without necessarily increasing cost, using many of the same principles described above. Finding these opportunities will likely be quite lucrative, and something that we are very interested in.

There will be a number of other stories and themes which we cover, but we wanted to give you a sneak peak of what we are working on for this upcoming year. As always, any questions please let us know.